00:00That surge in longer maturity Treasury yields, testing the resolve of global bond investors,
00:05torn between the possibility of locking in high rates, the risk of an even greater sell-off.
00:09Let's bring in our Bloomberg MLive strategist, Mark Cranfield, for more.
00:13Mark, it's interesting, I think, as Gerry and I were both sort of talking about,
00:18that oil prices, at least in the previous session, seem to have taken a back seat
00:22and we're seeing this momentum driving yields on their own.
00:28What's happening is the bond vigilantes are having a great time
00:31because they are exploiting the disconnect between monetary policy and fiscal policy.
00:36They love it when central bankers and governments are not on the same page.
00:40And that's exactly what's happening across the world at the moment.
00:43Inflation expectations as high as they've been for several years.
00:47And the markets are expecting that central banks will be under pressure from their governments
00:52to go very slowly in terms of raising interest rates.
00:55They're not going to be acting proactively.
00:57They're going to let it run for a while and then maybe they will raise interest rates after that.
01:02That's not good for bond markets.
01:04Bond markets like to see you getting ahead of inflation expectations.
01:07At the same time, governments are spending even more, particularly because of the defence sector.
01:12The war in Iran is forcing not just the United States, but the Europeans as well,
01:17and the rest of the world to respond quickly and ramp up defence spending.
01:21And to do that means their fiscal deficit is going to get worse.
01:24Investors can see that more bond issuance.
01:27And it's been made clear.
01:28Even Japan made a U-turn this week.
01:30Prime Minister Takeuchi said that she now has to do an extra budget,
01:33which wasn't expected by the market.
01:35So investors can see there's more bond supply coming.
01:39Yields are already high.
01:40Curves are relatively steep.
01:41And central banks are probably going to be relatively slow to address the inflation problem.
01:46That's a perfect storm.
01:47Bond vigilantes love it when it's in this situation.
01:50It is going to take a lot to put it right.
01:53Ending the war in Iran would be a good step.
01:56But more needs to be done to get inflation down.
01:59And then bond investors will feel more comfortable.
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